Amendments to the Serbian Companies’ Act enhance shareholders’ protection and impose new obligations on corporates

Only three months are left until the latest amendments to the Serbian Companies’ Act become applicable. The amendments bring about many changes to the corporate governance rules that the companies will have to take into account when organizing their affairs in the future. Some of the amendments may prompt the companies to amend their memorandums of association and other corporate enactments. We outline in this Newsletter the most important changes. Unless otherwise specified, all of them take effect from 1 October 2018.

Company name cannot refer to Serbia or SRB: Newly established companies in Serbia cannot use a reference to “Serbia” in their corporate names, or a reference to international acronym “SRB”, without a prior approval of the Ministry of Economy. Those corporates which have registered the names containing the acronym “SRB” before this was explicitly prohibited by the latest amendments may be required by the state to delete this reference from their corporate names.

Extension of registrable co-signature limitations: Currently, companies wishing to limit the authority of their representatives with a co-signature requirement may register, with the effect towards third parties, only a co-signature requirement whereby a director cannot validly sign without the co-signature of another director or registered representative. Other co-signature limitations, such as where the director cannot sign certain transactions without the co-signature of another person who is not a registered representative (e.g. shareholder), are currently not registrable and thus not opposable to third parties. This will change as of 1 October 2018, when the companies will be able to register all types of co-signature limitations, and those limitations will have the effect on third parties.

New rules on transactions involving personal interest: Currently, any transaction of the company in which controlling or significant shareholders supervisory board member, director or other representative has personal interest requires approval of non-interested shareholders, supervisory board members or directors (as the case may be), regardless of its value. The amendments narrow down this requirement to transactions involving corporate assets the value of which exceeds 10% of the total value of all corporate assets as per the latest balance sheet.

Furthermore, where a transaction involving personal interest affects assets in excess of the 10% threshold, an appraisal of the fair market value of the assets concerned must be provided to those voting on the transaction.

The company must publish a notice of the executed transaction involving personal interest on its webpage and in the commercial registry within 15 days from the date of the execution of the transaction. The notice must contain details of the executed transaction and an explanation of the nature of personal interest involved. Failure to publish the notice exposes the company to a fine that may range from approx. EUR 840 to approx. EUR 8,400.

Companies’ memorandums of association to include individual shareholders’ addresses and certain other shareholder information: Effective from 1 October 2018, corporate articles of association will have to include certain additional identification details of the shareholders.

Distribution to shareholders via share capital decrease not possible in LLC: By this explicit prohibition, the amendments formalize the long-lasting practice of the Commercial Registry that has been refusing to register share capital decrease in LLCs if the reason for the decrease was to make distribution to shareholders. Share capital decrease in LLC is possible only for the purpose of: (i) covering of losses; (ii) creating or increasing reserves for loss coverage or share capital increase; (iii) releasing a shareholder from the obligation to pay subscribed contribution, (iv) withdrawal and cancellation of a shareholder’s quota or (v) cancellation of treasury shares.

It is difficult to grasp policy reason behind prohibiting LLCs to repay excess capital to shareholders.

Corporate finance in LLC: “Additional payment” is a sui generis form of equity finance for limited liability companies. It does not increase the company’s capital but is substantially similar to a shareholder loan. The amendments clarify that the shareholder who made additional payment to the company prior to selling its share is entitled to be repaid the “additional payment” made to the LLC, unless otherwise provided in the sale and purchase agreement. It is now also stipulated that the shareholder of LLC who has not paid in full its subscribed share contribution, but has in the meantime provided financing in the form of “additional payment”, may offset the claim for repayment of the “additional payment” with its outstanding obligation to pay capital contribution, subject to the shareholders assembly’s approval.

Withdrawal of shareholder from LLC: Currently, a shareholder cannot withdraw from LLC (even if it requests no compensation for its quota) if this would cause damage to the company or if such withdrawal allows shareholder to circumvent the duties to the company. These elusive provisions are replaced with a clearer one providing that a shareholder who does no request buy-out of his quota may withdraw from LLC at any time provided it has no outstanding capital contribution obligation.

Voting rights in LLC clarified: In LLC, voting rights can still be disproportionate to the size of the shareholder’s quota, provided no shareholder of LLC is entirely stripped of voting rights).

Minority shareholders’ rights improved: The threshold for requesting a meeting of shareholders’ assembly is reduced from 20% of total registered capital to 10%. Furthermore, shareholders jointly holding 5% of total registered capital are entitled to request inclusion of an item into the agenda of the shareholders’ assembly (down from 10%).

Enforcement of declared dividends: The law provides that dividend payment date must be determined in the shareholders’ assembly resolution declaring the dividend and that such date may not be later than 6 months from the date when the dividend is declared.. This makes it easier for shareholders to enforce their claims for declared dividend payments.

New rules on notice of shareholders’ meeting: The amendments widen publication requirements. A notice convening a meeting of shareholders must set out the agenda and, where applicable, clearly indicate the item on the agenda which refers to the entering into significant transactions (transactions involving assets in excess of 30% or more of total net assets as per the latest balance sheet). In case of joint-stock companies, a notice of the shareholders’ meeting must be published not only on the web-site of the company and the commercial registry, but also on the web-site of the Central Registry of Securities and, if the company is listed, on the website of the Belgrade Stock Exchange. The notice of shareholders’ meeting in a listed company with the agenda must be be published on the company’s web-site and on the website of the Belgrade Stock Exchange no later than within a day from the date of the convocation decision.

New rules on significant transactions: Transactions involving acquisition and disposal of assets representing 30% or more of the total net assets value as per the latest balance sheet, require shareholders’ approval. A series of individual interconnected transactions should be regarded as a single transaction if concluded within the preceding 12-month period. The amendments clarify that a series of individual interconnected transactions should be regarded as a single transaction if they have common purpose or if the nature of a particular transaction necessitates that a series of other individual but interconnected transactions be concluded in parallel. However, the amendments attempt to remove the room for duplication by specifying that in case of secured loans, the amount of the loan and the value of collaterals should not be added up but the 30% threshold should be measured against the highest value of individual collaterals provided that the security on these collaterals is established simultaneously (requirement that calls for interpretation).

If significant transaction was concluded without proper shareholders’ resolution, the shareholders holding together at least 5% of shares have right to sue for nullification of the transaction, provided they had that status on the date of the execution of the tainted transaction. Shareholders who acquire shares after the execution of the tainted transaction cannot sue for its nullity but have a derivative claim against the company’s directors and/or supervisory board members for damages caused to the company. The claim for nullity of a transaction or damages can be filed within 6 months from the date of the shareholders’ assembly on which the annual business report for the financial year in which the transaction occurred is discussed, but in any case not later than within three years from the date of the transaction.

Narrower rights of dissenting shareholders: Only shareholders who attended the shareholders’ assembly and voted against or abstained from voting on certain matter on the agenda giving right to mandatory buy-out, may compel the company to buy their shares. Shareholders who did not participate in the meeting will no longer have this right as of 1 October 2018.

Squeeze-out of pledged shares possible: The amendments remove the uncertainty regarding the possibility to squeeze-out minority shareholders whose shares are pledged or otherwise encumbered. The law makes it clear that this is possible. The squeeze-out threshold remains at 90%.

Mandatory archiving after liquidation: The amendments clarify that the corporate documents of a liquidated company must be kept on the territory of Serbia in accordance with the archiving regulations. Company in liquidation must appoint an individual or a legal entity from Serbia as a designated safe keeper of the documents and this person must be registered with the commercial registry.

Mandatory registration of e-mail address: All companies, private entrepreneurs, as well as branches and representation offices of foreign-based companies, must register their e-mail addresses in the Commercial Register by 1 October 2019.

Corporate stamps no more: Not all amendments impose new requirements on corporates. Serbian companies are no longer obliged to use stamp starting from 1 October 2018. The amendments annul 117 laws and regulations which require the use of stamp on corporate documents and prohibit re-enactment of stamp requirement by other laws or regulations.